Three approaches to budget-making

It is that time of the year when everyone has a view on what the government should do with the Union Budget. As the Budget preparation team locks itself into the cellars of North Block, there are three choices before the (new) government.

The first is to get defensive and tentative in dread that the recent Delhi elections represent a rejection of brave policy. The second is to get bold and decisive, in line with the majority mandate won in last year's national elections. The third is to lose the plot and deliver a Budget that is disconnected with ground reality.

The first approach would be most tempting and easy to achieve. Examples of this approach would be tweaking a tax rate here and there; moving an item from one classification to another for indirect taxes; and playing around with some tax deductions. There could even be some intuition-based social reform that is not linked to either empirical data or study of behavioural science.

An example would be exempting long term capital gains on transactions in constituents of a popular stock index for a year - essentially, a half-hearted and ham-handed attempt to boost transactions in the stock market.

If this was the only approach, it would spell disaster. Indeed, there would be elements of this approach in the budget speech, but the key is to not do just this. Hence the need to focus on what can be done with the second option. The second approach would be tougher to conceive than to achieve. The national electorate did not vote this government into office with expectations of doing what the UPA would have done anyway.

The expectations created to win the elections deserve incisive interventions. There are structural changes crying to be made. A classic example of skewed policy is that it is far tougher in India to acquire shares of minority shareholders to delist a listed company, than to acquire the land of a farmer whose family depends on subsistence farming, to build a shaving cream factory on it.

Essentially, the second approach would need hard and radical thinking with empirical support - for example, considering abolition of short term capital gains tax altogether on securities would represent such an approach. While predecessors have claimed credit for bringing in new laws, I have decided to remove laws, said Prime Minister Narendra Modi at various forums. Focusing the approach of removing laws on obsolete laws that do not affect anyone's life in any case would be a waste of time.

What is needed is a conscious effort to identify laws that do not serve any purpose and yet have to be complied with - just because the laws have always been there. Take the case of the law that enabled nationalisation of banks, or even the Banking Regulation Act, which deals with banks not owned by government.

The provisions were conceived in an era that bears no resemblance to current-day banking. Be it the structure of the board of directors of banks, or the provisions on what form of expertise should be represented on them, the provisions have no relevance for how banking is run today.

That is just one example. In an era where India is seeking to invite investors from around the globe to 'Make in India', the law governing manufacturing is replete with obsolescence on multiple counts. The enormous clamour for "labour law reform" is obsessed with making it possible to sack workers at will.

The inability to sack employees is itself a product of badly designed law that focused on making it difficult to dismiss employees and lost sight of the need to spend on safety of employees who the employer does not desire to sack. The third approach is one of living in an ivory tower without any clue of what is necessary and what is being expected.

If expectations on the ground are not being heard, this approach gets adopted quite easily. This approach spells unmitigated disaster - where everything can go wrong. The retrospective tax amendments introduced to undo a loss in the Supreme Court on tax interpretation, just because the government was smarting from a loss of what it sincerely believed was a good case, would fall in this category. Given the expectations built in getting this mandate, if one more budget exercise goes by without a policy intervention to undo the messy retrospective amendments, the faith would be lost.

Finally, the government should disregard all the feedback it hears on the front pages of newspapers - no industrialist or commentator from the business sector would give a marking of anything less than 7/10. It, then, becomes a case of the Emperor's clothes.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) somasekhar@jsalaw.com